16th May 2014

Are the claws too long?

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16th May 2014

Are the claws too long?


pound signThe Bank of England’s Prudential Regulation Authority launched a consultation on its new pay rules which could see bonuses being clawed back six years after they have been paid if bankers “misbehave”, or if the bank enters a “material downturn” in financial performance.

Although these new pay rules appear to be harsh enough, this, when added to the fact that regulators are also looking at bonuses not vesting until five years after the date that they have been awarded, would mean they could be clawed back as much as 11 years later after they were paid!

If an employee and employer agree to this in an employment contract, then there is no reason why it shouldn’t be enforceable. However, there are a number of practical problems that I can see with these proposals:

  • The banks will be forced to keep such information for 11 years whilst its currently only kept for 6
  • If non-UK banks don’t agree to this, how this will impact upon the competitiveness of the City when it seeks to compete against other financial centres in Europe and further afield?
  • The simplest way around these proposals, which relate only to bonuses, is to increase basic salaries so as to reduce the bonus element of a banker’s pay packet. This does seem to be strange when the corporate world in general is coming under more and more pressure to link remuneration to performance
  • What happens if the person in question doesn’t have the cash 11 years later? The only recourse of the banks will be to sue the individual in question and this will lead to further reputational risk for the banks.

The only thing for certain is that if these rules come into force, the lawyers are going to have a field day!